Greetings, and welcome to Marriott Vacation Worldwide Third Quarter 20 17 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, conference is being recorded. It is now my pleasure to turn the conference over to your host, Mr.
Jeff Hansen, Vice President, Investor Relations. Thank you. You may begin.
Thank you, Rob, and welcome to the Marriott Vacations Worldwide Third Quarter 2017 Earnings Conference Call. I am joined today by Steve Weisz, President and CEO and John Geller, Executive Vice President and CFO. I do need to remind everyone that many of our comments today are not historical facts and are considered forward looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments. Forward looking statements in the press release that we issued this morning, along with our comments on this call, are effective only today, November 2, 2017 and will not be updated as actual events unfold.
Throughout the call, we will make references to non GAAP financial information. You can find a reconciliation of non GAAP financial measures referred to in our remarks, in the schedules attached to our press release as well as the Investor Relations page on our website at ir dotmvwc.com. I will now turn the call over to Steve Weisz, President and CEO, of Marriott Vacations Worldwide.
Thanks, Jeff. Good morning, everyone, and thank you for joining our 3rd quarter earnings call. This morning, I'll briefly update you on the impact from the recent hurricanes, and then I'll discuss our solid 2017 third quarter results along with my thoughts on our outlook First, our thoughts and prayers go out to those who have been affected by the hurricanes in North America and the Caribbean as well as the fires in California the earthquake of Mexico City and the tragedies in Las Vegas and New York City. Specifically, as these events relate to us, in what has obviously been a very active hurricane season. 2 storms in particular, hurricanes Irma and Maria affected our operations most directly.
We felt the impact of Hurricane Irma almost immediately on the island of St. Thomas before the storm continued on its path eventually affecting Florida and the East Coast. Hurricane Irma was followed closely by Hurricane Maria, which impacted our resort in St. Gibbs, and compounded an already serious situation on the island of St. Thomas.
The bright spot in the immediate aftermath of these terrible storms was that all of our associates owners and guests remain safe and recovery efforts that our effective returns began almost as soon as the storms had passed. Hurricane Irma heavily impacted our resort on Markle Island. And due to the enormous size of the storm, It also impacted our resorts from Miami in the Fort Lauderdale area to Orlando and as far north as Hilton Head Island. The majority of our resorts and sales centers reopened by early October. As for St.
Thomas, in the weeks since the storms, we have gained a much better picture of the challenges than I would like to thank you for joining us today. I would like to thank you for joining us today. I would like to thank The return of normal operations to the island itself, including repairs to the electrical grid will be the primary factor in determining when we will reopen. We do expect our sales center there to remain closed we typically see roughly $20,000,000 to $22,000,000 of annual contract sales there, and we expect the impact on contract sales to extend well into next year We should be Shifting to our business results, company contract sales grew 17% year over year or almost $29,000,000 to over $198,000,000. This contributed to a $23,000,000 improvement in adjusted EBITDA to $74,000,000, an 2016.
As I have mentioned throughout the year, with our change this year to a 12 month reporting calendar each of the first three quarters included roughly 1 additional week of operating results. So, our year over year growth will not be contract sales would have increased nearly 13%. This contract sales growth was driven by our North America segment, which adjusting for the calendar shift grew 8% compared to the third quarter of 2016, including an over 3% improvement in VPG, to $3482 and a nearly 7% improvement in tour flow. Underlying this performance was continued momentum in our marketing platforms. The call transfer and encore programs are primary growth drivers continued their success in generating tour flow, not only within our existing owner base, but also by driving an estimated 13% I am pleased with this growth, especially as we were able to improve our closing efficiency 20 basis points year over year.
Our tour growth was muted by the impact of the hurricanes, which affected contract sales by an estimated $12,000,000 in the quarter. Adjusting for the impact to our tour flow caused by the hurricanes, we estimate North America contract sales would have grown roughly 15% over the third quarter of last year. Almost half of this growth came from our same store sales locations, driven primarily by new marketing program. The momentum in these programs is on track to continue for the remainder of high expectations for the future growth in the first quarter of 2019. In the first quarter of 2019, Staying in our North America segment, adjusting for the impacts of the calendar shift and hurricanes, new destinations drove roughly 8 percentage points or just over quarter as the Miami area worked to get back to being a world class vacation destination.
Our Markle Island location closed for several weeks due to Hurricane Irma. If you'll recall, our property on Marco was being expanded through a capital efficient structure in a third party has been completing 2 additional towers. We had expected to open the last tower in the fourth quarter of this year, delaying the acquisition of these units until a future date. Due to hurricane due to damage caused by the hurricane force winds and rain, however, the opening of the last tower has now been delayed into the early part of next year. This delay will impact tour flow at our Marco and sales center until we are able to open the remaining 112 units in this tower.
Overall, I'm very pleased with the performance of our new sales center and look forward to In our Asia Pacific segment, adjusting for the estimated impacts of the financial reported calendar change this year, contract sales were down nearly 1 percent from the third quarter of 2016. Our new location in Surface Paradise, Australia continues to ramp up with contract sales growing almost $2,000,000, more than doubling the contract sales performance from the third quarter of last year. This growth was offset by As part of our longer term growth strategy, we have become, we have begun expanding our marketing channels, most notably in Indonesia and Japan, with a primary focus on first time buyers. This expansion is fundamental to driving future incremental tour flow in the region. To that end, I'm very pleased to announce that we have recently completed the acquisition of our first property in Valley and expect to begin operations at this beautiful location in the coming months.
Now let me take just a moment to provide my thoughts on how our solid third quarter performance coupled with the effects from the gains have impacted our expectations for our full year results. Prior to the arrival of the hurricanes, we were trending very well toward our full year guidance range of 12% to 16% growth in contract sales and $282,000,000 to $292,000,000 of adjusted EBITDA. However, as we mentioned in our press release in late September, the hurricanes will negatively impact our contract sales growth by approximately $20,000,000 or roughly 3 percentage points. In addition, we estimate that adjusted EBITDA will be negatively impacted by roughly $7,000,000. In light of these impacts, we are adjusting our contract sales guidance
for the full year growth
to 10% to 13% and full year adjusted EBITDA guidance to a range of $278,000,000 As we look at the remainder of 2017, with these numbers of tour packages already on the books compared to last year, and new sites performing well. We are very pleased with how we are performing and are confident that our growth strategy will continue to drive improved results as we head into next year. With that, I'll turn the call over to John to provide a more detailed look at our 3rd quarter results.
Thank you, Steve, and good morning, everyone. I too am very pleased with our strong third quarter results. Adjusted EBITDA totaled $74,000,000, $23,000,000 or 46 percent higher than the third quarter of 2016. As a reminder, we do not exclude the timing it's important to remember that last year's third quarter adjusted EBITDA was unfavorably impacted by roughly $12,000,000 of revenue ability, much of reporting calendar change were up excluding the adverse impact of the hurricanes in the quarter, we estimate that contract sales would have grown nearly 13%. As it relates to the hurricanes, we estimate that lower contract sales as well as lost revenues in other parts of the business negatively impacted our adjusted EBITDA from the hurricanes, our development, resort management and financing businesses all contributed to our year over year improvement in adjusted EBITDA.
Development margin grew $22,000,000 or 1 126 percent. Our financing margin increased $4,000,000 or 21 percent and our resort management business grew $2,000,000 or 6 percent. For the 3rd quarter, company adjusted development margin increased $9,000,000 or 29 percent to $38,000,000 from the third quarter of 2016, and our adjusted development margin percentage totaled 21.3 percent in the quarter, 160 basis points higher than the third quarter of 2016. In addition, we estimate that the hurricanes negatively impacted While our full year 2017 goal for development margin was 21% or better given the impact of the hurricanes We do expect $10,000,000 or 35 percent to $40,000,000 in the 3rd quarter and our adjusted development margin percentage was 24.4% or 240 basis points higher than the third quarter of 2016. The $10,000,000 increase in adjusted development margin in America was driven primarily by $8,000,000 from higher contract sales volumes, product costs and $1,000,000 $3,000,000 of higher marketing and sales costs of which $1,000,000 related to the ramp up of our newest sales distributions.
For the quarter, we estimate that the hurricanes unfavorably impacted adjusted development In our financing business, revenues increased $6,000,000 or 19 percent to $35,000,000 in the third quarter of 2017. These results reflect a $7,000,000 increase in interest income from a combination of our growing notes receivable balance as well as the impact programs. Our notes receivable portfolio continues to perform very well as we have seen our financing propensity increase 240 basis points to 66% in the 3rd quarter. Average FICO scores of buyers who financed with us in the quarter 738 and delinquency rates remain near historic lows. Financing revenues net of related expenses were up 21% $23,000,000 from the third quarter of last year.
In our rental business, rental revenues increased $7,000,000 to $81,000,000. Rental revenues net of expenses were $10,000,000, down $3,000,000 from the prior year. These results reflect a 13% increase in transient keys rented, which includes the benefit of an additional 8 days associated with the change in our reporting calendar. This increase was partially offset quarter. The increase in revenue was offset by higher rental inventory costs, including higher utilization of banking and borrowing and explore options, as owners continue to take advantage of the flexible usage options of our points program.
Results also reflect a nearly 11% increase in preview room nights over the third quarter of 2016. Remember, the rental rate from preview usage is less than that from transient rentals. So as we utilize more of our rental availability for preview room nights to support our increasing tours We expect this activity will remain a headwind to rental margins as we continue to grow our marketing packages. And our resort management and other services business results improved $2,000,000 or 6 percent to $32,000,000 in the quarter. These results reflected higher fees from managing our portfolio of resorts, higher exchange company activity and the impact of the additional 8 day from the reporting calendar change.
These increases were partially offset by lower ancillary margin resulting from the impact of the hurricanes as well as the timing of certain technology related costs. G and A costs were up nearly $5,000,000 in the quarter of which roughly $2,000,000 resulted from the additional 8 days from the reporting calendar change. The remainder of the increase driven by normal inflationary cost increases third quarter of 2016. This was driven primarily by higher contract sales volumes as well as the additional 8 days from the reporting calendar change. Moving to our balance sheet vacation ownership notes receivable eligible for securitization and roughly $245,000,000 in available capacity under our $250,000,000 revolving credit facility.
Our total debt outstanding at the end of the quarter was roughly $1,200,000,000, consisting primarily of $895,000,000 associated with our securitized notes receivable. In addition, we issued $230,000,000 of convertible notes during the third quarter. While we do not have an immediate need for the proceeds we felt that it was an opportune time for us to put We did evaluate several different debt instruments and believe that the one we chose provides the most flexibility for us in terms of covenants and use of proceeds and enables us to take advantage of the strength of our stock price and a very low current rate of interest. The call spread arrangement we entered into at the same time resulted to $176.68 per look for opportunities to grow our business. In addition to those opportunities, we will look to return excess capital to our shareholders through share repurchases and dividends.
As it relates to our return of capital in the quarter, we repurchased 196,000 shares of our outstanding common stock for $79,000,000, including $40,000,000 purchased with proceeds we received from the convertible debt offering. For the 1st 3 quarters of 2017, we returned $112,000,000 to our shareholder through both our share repurchase and dividend programs. Now, let me take a moment to update you on the status of our hurricane related insurance claims. As it relates to Hurricane Matthew, which impacted us in the fourth quarter of 2016, we received nearly $9,000,000 and insurance proceeds in the third quarter. Given that these proceeds relate to last year, we have excluded them from our adjusted EBITDA results for the third quarter.
For hurricanes Irma and Maria, Steve walked it through the high level impacts of these powerful storms, which we estimate will negatively impact full year contract sales by roughly 20,000,000 We continue to work with as well as property damage experienced by both us and our owners associations. Now, let me turn to our outlook for 2017. As Steve mentioned prior 17 that would have been in line with our prior guidance. However, taking into account the estimated $20,000,000 negative impact from the hurricanes on full year contract sales, we now expect contract sales to grow 10% to 13% for the year. Shifting to adjusted EBITDA taking into account the estimated $7,000,000 negative impact from the hurricanes, we expect 2017 adjusted EBITDA of between $278,000,000 $283,000,000.
For the 4th quarter, we expect adjusted EBITDA of between 64% and $69,000,000. Keep in mind that our 4th quarter compares unfavorably to the prior year quarter given the change in our reporting calendar Since our first three quarters this year benefited from an additional 22 days of operating results, the offset comes in the fourth quarter where our 2017 fourth quarter will have 20 days less of operating results as compared to 2016. In addition, our outlook contemplates roughly half of the hurricane impact occurring While we don't typically provide quarterly guidance given the impact of the reporting calendar change as well as the continued impact of the hurricanes, Let me $36,000,000 $40,000,000 in the 4th quarter. Resort management should continue to perform well with margin between $34,000,000 $36,000,000 Our financing business, excuse me, for our financing business, our margin could be between $20,000,000 $22,000,000 in the 4th quarter. While slightly lower than the 3rd quarter results,
it does include a full quarter
of interest expense associated with our 2017 securitization. And for our rental business, our margin could be between $3,000,000 $5,000,000 as we continue to utilize preview room nights to fulfill marketing package activations and experience higher rental inventory costs. I recognize there are a lot of moving parts to our business. However, putting it all together, I'm excited about our projected full year results which should generate strong year As such, we are raising our expectations for adjusted reflecting the benefit of the deferral of capital and other spending and to a lesser extent lower cash income taxes. Please note that this range includes approximately deals this spending may also be deferred into 2018.
Our results through the first three quarters have been President with contract sales growth of 13 percent on a comparable reporting calendar basis and adjusted EBITDA of $214,000,000 Our newest sales distributions are open and growing and our marketing programs are continuing to ramp up very nicely. BPG has remained solid throughout the year and tour activations are well ahead of the same point in 2016. All of which this gives us confidence that 2017 will be a tremendous year. As always, we appreciate your interest in Marriott Vacations Worldwide. And with that, we will open up the call for Q And A.
Rob?
Thanks, John. At this time, we'll be conducting a question Our first question comes from Brian Dobson with Nomura. Please proceed with your question.
Good morning, Brian.
Hi, good morning. Good morning. Hi. You could delve into, in a little bit more the moving parts in tour flow and VPG and what allowed you to increase VPG while increasing tour flow so dramatically?
Well, a part of that is, I think I referenced in my remarks a 20 basis point improvement in closing rate. When you get that, that obviously has an impact on VPG. The other thing is as we continue to adapt to a more tour flow from first time buyers, our first time buyer tours, I should say. We have become more adept at being able to close on them as well. So I personally think that, I mean, when you step back and say, well, how does the VPG calculation look like?
It's really a function of the average sale price and the closing rate. So you get a little bit of inflation as your cost of per point goes up. And as a closing rate goes up, and that's what really drives the VPG.
Great. So the majority of it is really fine tuning that sales approach for the new type of consumer.
And then as you're looking at over the
next 2 years, where what key regions would you like to see the company expand into?
Well, we've said all along that, we have a footprint in, in Europe, which we have said that for the foreseeable future, we don't see a lot growth in that area. We still have some residual inventory to sell there, not much. And obviously, we'll always be in our kind of a resale environment over there. Our 2 primary focuses are, North America, which, which I would tie into that Latin America as well. And then Asia Pacific as the primary area is where we're going to focus on our growth.
Great. Thank you very much. Thank you. Thanks.
Our next question is from Patrick Solis with SunTrust Robinson Humphrey. Please proceed with your question.
Hi, Patrick. Hi, good morning. Couple of questions here.
First on, can you remind us where you stand now, on your long term target of, first time buyers versus the upgraded sale How was that progressing?
Well, as you'll recall, we kind of post the great recession, we were at roughly sixty-forty, reloads versus first time buyers. I think we've got that down maybe a point and a half, almost two points. In terms of our tour flow. But, you know, as we said all along, you know, we have, while there's no magic in the number of a roughly a fifty-fifty goal, want to continue to move in that direction because we believe for the long term health of the business, adding more first time buyers is good for us.
Yes, the only thing I'd add to that is, yes, so this year, Patrick, I mean, we've got double digit growth in contract sales to first time buyer. So this programs are kicking in. In terms of the mix, that's not actually, we're selling that much to existing owners too. So, the mix has moved a little bit to Steve's point, but we're not going to apologize for selling more to our owners who love our product, but our real goal is to continue to drive that first time buyer growth. Okay.
Good color there. Moving on, my next question, have you seen any impact on your, expectations for your loan loss provision due to the hurricanes? And what I mean by that specifically is, you know, the ability to pay a timeshare loan for people who may be, based in a hurricane impacted market?
Yes. We've seen really no impact think we've got a handful of calls from, from folks that have a mortgage with us that are in those hurricane disaster areas. And when that happens, we work with those owners and give them the relief or whatever they need to keep going. So, but like I said, it's been a handful of folks, Patrick.
Okay. Maybe this next question related a little too granular. You know those folks you just describe, is that going to be more of your lower credit score type of customer or maybe I'm just getting too specific here at all.
Yeah. We're just talking about a handful of people.
Fair enough. Fair enough. Just a couple more questions here. In previous call, in a previous call you had mentioned, for the right acquisition keyword right that you would still be comfortable you would be comfortable with up to 3 times leverage. Is that still your view?
Yes, I mean, look, it's facts and circumstances, right, for whatever that right acquisition would be. The key for us is what I've talked about is long term, we feel for our company somewhere in that to 2.5 times of normalized leverage running the business is probably about the right leverage as we think about it today. Now for an act for the right acquisition, I go above 3, would I go higher with the plan to pay that down? Sure. I mean, like I said, it's going to be facts and circumstances.
I wouldn't look at it as a sustained leverage we want to went above it, but a way to bring that leverage back down over time.
Okay. Thank you. And then last question here on your buyback program in the quarter. Is this a pro, a pragmatic to me, a discretionary or a program?
Well, when you say programmatic, I mean, what we've done, I think if you look at over the last couple of years, we've been fairly programmatic in buying our shares back. We, you know, when the stock price goes down, we probably are more opportunistic in buying more. So we do pay attention of what's going on in the market, but We continue to look at our stock as a good value and we'll continue to buy it back, with excess capital over time.
Okay. Thank you. That's all for me.
Thank you.
Our next question is from Chris Agnew with MKM Partners. Please proceed with your question. Hi, Chris.
Thank you very much. Good morning. Hi. First question, if I think about your year to date, your comparable contract sales growth, am I right in thinking it's about 13% and therefore that implies in the 4th quarter a range of I think flat to around 12% or let's say low double digit in the 4th quarter. I'm just curious what gets you to the high end of that range versus the low end and what have you been seeing so far in the fourth quarter?
Thanks.
Well, I think the first thing is as these new sales centers have continued to ramp up, you start to see that now. With that said, obviously, we have kind of some built in comparable headwind given the fact that they were, you know, new and coming online in the fourth quarter of last year. But I think your arithmetic, works pretty well. And and I think, you know, the goal is to continue. I mean, we can drive double digit growth in contract sales on a quarter over quarter basis, so we're pretty happy about that.
Got it. Thank you. And then when you talked about some of your high growth expectations, you mentioned additional linkage arrangements. Can you just give us an update on you've already set up are progressing and what sort of additional arrangements you're thinking of? Thank you.
Sure. You know, just as a reminder to everybody on the call, we have had linkage arrangements with Marriott Hotels throughout our existence as an organization. And as Marriott has expanded its portfolio, by organic growth or by acquisitions of additional properties, including the Starwood acquisition last year. We've taken advantage of that expansion by signing some agreements with several Western And Sheridan Hotels. And we're very pleased with how that is progressing.
And we are currently in negotiations on more locations within the legacy Starwood brands. To continue to grow our linkage platform.
Thank you. And then final question, can you give an update what your pipeline or, or maybe to ask another question,
when, when and where do
you start thinking about additional cell centers? And expanding the portfolio? Thank you.
Yeah. We have, as we've stated, our goal all along is wherever possible is to think about new resort destinations in, including new sales distributions and locations where we have no presence today. We, as I mentioned, we, we just closed on the transaction in Valley, and we'll be opening that new sales center in conjunction with that in the next couple of months. And we continue to look at other opportunities in Asia Pacific. Got several things that are kind of active.
Nothing that I'm ready prepared to to talk to in specifics at this point in time. Of course, we always continue to look in North America. There are still several, you know, kind of world class vacation destinations where we don't have our presence today. In North America and we're very active in that arena as well.
Great. Thanks very much.
Our next question is from Tyler Batory with Janney Capital Markets. Please proceed with your question.
Good morning, Tyler. Good morning. Thanks for taking my questions. So I wanted to ask a little bit more on 2018. I mean, you called out the potential negative impacts here from St.
Thomas and then Marco Island. But do you have an expectation that you're going to see maybe a potential lift potentially from people that canceled here in the third quarter or 4th quarter from the hurricane, maybe rebooking those trips in 2018?
Yeah, I think there's clearly, I believe there's some opportunity there. It might evidence itself more on the rental side than in the and the vacation ownership side. But if we do our job right, if there is more rental activity, then we'll try to you know, you know, you know, there's a lot of people in the the power that we're talking about in Marco, the 112 units. There's currently 102 units that are open and operate in Marco Island. So, when that additional tower comes on, which will be, we anticipate sometime in the first quarter.
Then, we'll, you know, obviously double the size of the resort. With that said, we've had a sales presence on Mark awhile and now for several years, So, essentially, what we get is we get some more, tour possibilities from in house and, people that are exchanging there and rentals. So I think that'll have some modest, impact to us next year, although not dramatic. St. Thomas is a little different situation.
Our sales center on St. Thomas was in the Frenchman's Reef Marriott Hotel. That hotel, according to the hotel owner, Diamond Rock, They've announced that that hotel will be closed throughout 2018. Our goal will be to try to figure out how we can establish some sort of a sales presence on St. Thomas, to generate some sales from that location But as I mentioned in my remarks, that location, you know, the previous sales center was generating $20,000,000 to 22,000,000 with the sales.
My expectation will be that it'll be something less than that if we get a small sales presence there, although it's too soon to tell and we'll give you a lot color on the next call.
Okay, great. It's very helpful. And then another follow-up here on the new sales centers. Can you discuss the VPG at those locations, how they compare to your existing sales centers and how the VPG there is trending versus your expectations?
It's generally pretty close. And you got to remember, you know, you get mixed. So you think a new sales center in New York City, which by definition, given the profile of the customer and everything else we see there has a tendency to run a relatively higher VPG. You can trust that to, you know, say, San Diego, which may be just a little bit lower. But on balance, the VPGs between our new sales centers and our existing sales centers, there's no meaningful difference between them.
Okay, great. That's all for me. Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session. At this time, I'd like to turn the call back to Steve Weisz for closing comments.
I'm very pleased with our 3rd quarter results. We're performing very well. We were performing very well prior to the hurricanes. And during and after their arrival, our associates prove themselves to be resilient as they faced the challenges brought by the storm. Is in these moments that you see who people truly are, and I cannot be more proud of what our teams have overcome.
I'm confident in our ability to deliver on our current growth strategy and look forward to speaking with you again on our next call. And finally to everyone on the call and your families. Enjoy your next vacation.
Time, and we thank you for your participation.